One in Five Users May Abandon Bitcoin Because of Privacy Concerns

Three German scientists are researching the perspectives of Bitcoin users on privacy, where their preliminary results confirm that Bitcoin users are highly aware of privacy but lack knowledge about specific techniques to de-anonymize transactions.

Privacy is a hot topic in the realm of Bitcoin. Scientists study how to anonymize and de-anonymize Bitcoin transactions, while companies already link addresses to identities and developers build improved techniques to cut those links. But when you want to know how users deal with privacy, you have to ask the users themselves. So that is what three German scientists from Berlin, Potsdam, and Leipzig have done.

Benjamin Faber, Tatiana Ermakova, and Ulrike Sander investigated the privacy awareness and potential concerns of Bitcoin users, conducting a study among active Bitcoin users to find out how they assess the privacy that the cryptocurrency provides.

The Sample

Like with any empirical study, the first and most important question is: How do you find participants? And how can you ensure that these participants are representative of the whole population of Bitcoin users?

Faber, Ermakov, and Sander used several social media channels like Facebook, LinkedIn, Xing, bitcointalk.org, and r/bitcoin to recruit participants. Furthermore, they sent out emails to “all students of a major university in Germany as well as to all 195 businesses listed on coinmap.org in Germany […], to 150 randomly selected businesses in the United States of America and […] in the United Kingdom.”

To validate if their sample represents the Bitcoin community as whole, they compared the demographic properties of the participants with those found out in other studies. “The most frequent respondent in this survey is a self-reported male (95 percent) German (54 percent) aged between 20 and 29 years (35 percent) or between 30 and 39 years (32 percent).” Except for the country, these properties perfectly match the demographics of other studies. So they seem to be representative.

Privacy of Bitcoin in a Nutshell

Before we present how these people assess privacy on Bitcoin’s Blockchain, let us look how the scientists themselves assess it. After the notion that Bitcoin transactions are publicly visible in the Blockchain and thus not anonymous, but pseudonymous, they explain how to break pseudonymity by linking addresses with identities.

A first well-known approach starts with the framework of transactions. Each transaction consists of inputs and outputs, both linked to addresses. Since many transactions combine several inputs from different addresses, it is possible to link all these addresses to one identity. With this method, it is possible to cluster addresses. A somehow disturbing example is walletexplorer.com.

The second approach is to “de-anonymize the Bitcoin network is the mapping of Bitcoin addresses to Internet Protocol (IP) addresses.” This can be done with a node observing other nodes, even though the results may not be completely reliable.

In summary, the scientists note, the “anonymity of Bitcoin users can be eroded.”

Faber, Ermakova, and Sander explain two common methods to defend user’s privacy; firstly, you should not reuse addresses or use stealth addresses. By doing so you can make it harder to cluster addresses. Secondly, you try to cut the link between addresses by using mixers, be they centralized like Bitfog or decentralized like CoinJoin.

Now let us examine the users. Do they know all this?

How the Users Assess Privacy

The scientists asked the users, how much they know about privacy. How do they assess it as a property of Bitcoin? Are they aware of techniques to de-anonymize Bitcoin transactions, and do the know how to increase their privacy?

Despite the obvious disadvantages, most users grant Bitcoin a relatively high degree of anonymity as stated in the draft study, “Overall, almost 40 percent associated a medium level of anonymity with the platform, followed by 30 percent who rated the level of anonymity as high.“ However, another one-quarter of the participants believed that Bitcoin provided little (14 percent) or no (12 percent) anonymity. One out of five even considered abandoning Bitcoin due to anonymity concerns.

After this, the researchers asked about the awareness of decentralization techniques. With 85 percent most of the users are aware that Bitcoin transactions can be de-anonymized, and 50 percent are concerned about this fact. But as the scientists dug deeper, the knowledge faded. Asked about cluster analysis and IP linking the most frequent answer was “I am not aware“ (34 to 30 percent). Another third of the group were aware but not concerned about this technique, while only 29 percent are concerned about cluster analysis and only 22 percent were concerned about mapping IP addresses.

How Users Try to Improve Their Privacy

Next, the scientists asked if users use techniques to improve privacy. Surprisingly more than half of the sample (53 percent) did know of stealth addresses. Given that stealth addresses are not supported by most wallets, this might be the reason only 7 percent did use them.

Significantly higher was the knowledge about the rule to not reuse an address. “Only 18 percent are not aware that single use of public addresses is an anonymity improvement measure. 35 percent are aware but do not adopt it and 47 percent adopt it. Therefore, it seems to be a well-established technique.”

Only slightly smaller is the knowledge about ‘coin mixing.’ The study notes that, “38 percent of the participants would actually use coin mixing services. Another 38 percent would not use them, and 24 percent do not know the method.”

In summary, the users seem to be well aware regarding the privacy of bitcoin transactions and technologies to increase the anonymity of using the network. This confirms that privacy is one of the most important properties of Bitcoin.

Virtual currency is not legal tender, is not backed by the government, and accounts and value balances are not subject to consumer protections. The information does not constitute investment advice or an offer to invest.